Many teenagers and young adults use a co-applicant or co-signer on a car loan application as a way to strengthen their buying power and improve their interest rate when seeking financing. This is typically because a young person has a limited credit history and the lender wants to see a responsible party willing to back up the principal applicant. Because of this, the credit rating of both parties is taken into consideration when reviewing a car loan application.
Reasons for a Co-Applicant
If you haven't been employed for very long, have a limited amount of money in your bank account, or have poor or no credit yourself, a co-applicant can be useful, provided he has good credit himself. The lender will see the good credit rating and be reassured that the co-applicant will take over payments should you fail to make them. If the co-applicant has bad credit, the lender may believe that if you don't pay your bills on time, there's not a great chance the co-applicant will pay them either, particularly if she hasn't had a good track record of paying her own bills on time.
Impact of Bad Credit
Bad credit, either yours or your co-applicant's, can make it difficult if not impossible to secure a car loan. A lender that agrees to finance you may require that you make a sizable down payment, and the lender is likely to charge you a significantly higher interest rate then it would charge someone who has good credit. This can substantially raise your payments on the car loan. Shop around for different loans or seek out lenders that specialize in making loans to applicants and co-applicants with poor credit ratings.
Alternatives to a Co-Applicant
If you can’t find a co-applicant with good credit, explore other financing options. You might be qualified to finance a less expensive car on your own, or you could save enough cash for a sizable down payment and then take a car loan for a lesser amount. Another option is to ask a relative like a parent or grandparent to make you a cash loan to buy a vehicle, with the understanding that you will repay the loan with interest, and within a certain time period.
Getting Credit on Track
Building a strong credit history when you’re young can lead to long-term financial health and stability as an adult. To do this, pay all of your bills on time, and don’t take loans or apply for credit cards unless you have the financial means to repay your debt. Getting behind can snowball, leading to fees, late charges, increasing interest rates and a financial picture that can be difficult to improve.
Lisa McQuerrey has been an award-winning writer and author for more than 25 years. She specializes in business, finance, workplace/career and education. Publications she’s written for include Southwest Exchange and InBusiness Las Vegas.